Is the World Moving Forward or Backward?

The year is starting to feel like we are back to 2022. Inflation remains the No. 1 worry for central banks around the world because they do not seem to be receding. The airline and aerospace industry is accelerating but coping with finding the right candidates who will  stay long enough to start and finish projects and assigned responsibilities. Artificial intelligence (AI) is here to stay and all companies are already working on implementing it or speeding up the digitalization process to reduce costs. Layoffs, mostly in the technology sector, are higher than in 2022. 

Add to all that the fact that the banking system has been hit with the fallout from Silicon Valley Bank’s bankruptcy. Furthermore, the Federal Reserve continues to raise rates to prioritize lowering inflation, with a 2% target that is now around 7% annually on average. Mexico is on par with the Federal Reserve, which allows the peso to remain stable, but if there is a probable contagion within the banking sector or if interest rates continue to rise, Mexico’s external debt becomes more expensive to pay. The consumer index remains low to stable but the outlook is not entirely good. People still travel under these circumstances but awareness of increased prices tends to have an effect on spending, which  is expected to slow down in the coming months, including mortgage payments or credit card usage. 

In terms of industry, Mexico has the benefit of the nearshoring promise as industrial space is basically close to hitting 100%. The question is how much actual infrastructure can continue to sustain it or will we only get a partial benefit from this ongoing opportunity. China has started to open its economy 100% but President Xi Jinping’s close relationship with Russia’s Vladimir Putin is not helping its image, even as it presumes to broker a peace deal. Its companies want to keep its factories from going abroad but the COVID-related hit to their inventories made everyone think twice. The US still has not moved forward to reset economic relations as was expected  since China has not backed down from its claims on Taiwan nor has it tried to assuage President Joe Biden’s concerns regarding spying on Americans. All these variables can be added to the illegal invasion of Ukraine, which is already more than 13 months old and with no sign of stopping. NATO countries and the US continue to support Ukraine and arm it with the most lethal and modern warfare equipment. Mexico can continue to take advantage of this global scenario as interest rates at around 11.75% today are becoming impressively attractive to investors,  keeping the risk of instability at bay. USMCA negotiations on the energy sector and agricultural industry are being evaluated by the Americans as they are not happy with the limited imports of their supply nor with the nationalist turn of the current government. 

A worse-case scenario does not seem to be on the horizon. Politics will become a central focus in 2024 as presidential elections will be held both in the US and in Mexico. The turmoil comes when candidates turn to attack messages to appease their respective base  of voters. Republicans, more than Democrats, are increasingly focusing on fentanyl and Mexico’s security issues in the wake of  drug gangs kidnapping Americans and increasing crime rates. From its side, the Mexican government has turned to the “foreign intervention” story to pump up  nationalistic pride. Mexico can continue to focus on the nearshoring equation with the states taking the lead on promotion and capture of foreign direct investment into Mexico, such as Tesla in Nuevo Leon. More news like this can help to stave off any instability caused by external factors. It will be interesting to see how the consumer index behaves given that the Mexican federal government made a pact for basic consumable supplies and continues to subsidize gasoline prices.

The aerospace industry in this entire scenario is positioned to experience the most fantastic growth cycle since 2005. The world is hungry for travel on a national and international basis as fares are affordable enough to go out in the post-pandemic era. This is driving a lot more manufacturing to North America like never before as China’s exit is becoming imminent. MRO is again the focus in Mexico with the push to hire highly qualified technicians and engineers, mostly in the northern part of Mexico. A few resilient companies and non-OEMs like Innocent were able to hold off the near crushing effects of the pandemic that saw  slow sales and diminished purchase orders from April 2020 up until mid-late 2021. Most small and medium businesses had to renegotiate with all suppliers to get on with repaying past dues, such as rent. Poised to make a difference are all these companies that made those sacrifices at the expense of company savings over the last few years. Despite the difficult, war-torn scenario in Europe, the industry is taking advantage  with more work, consulting, engineering and machining, thereby keeping the industry afloat and growing again at record speed. Other industries are keeping pace as well, such as the food industry that never lost sleep during COVID and is gearing up for major changes in how to operate in an AI world that will be replacing a lot of repetitive, cyclical jobs. More automation operators and supervisors will have to be hired, too, to keep machines and robots working continuously. 

In summary, although it is a continuing struggle with inflation worldwide, prices seem to be somewhat stabilizing, oil prices are coming down and consumer shifts will soon become evident. Take, for example, milk and how it has evolved, with so many plant alternatives like coconut, almond or plain plant products. Keeping finances healthy and avoidance of overspending are basic rules of engagement. More is to come in Q2 and in regard to the Russia-Ukraine war,  we can expect a medium to long-term effect rather than a sudden peace.